In October, the ADP employment report showed employment falling 157K, a much larger drop than expected and the largest since December 2001. The previous month was also revised down from -8K to -26K. Since October last year, the ADP report has been consistently on average around 90K better than the Payrolls report. This would point to a loss of around 250K in the US Payrolls report on Friday, which would be in line with losses registered during previous recessions.
Similar to the drop in the ISM manufacturing, the ISM non-manufacturing deterio-rated sharply in October. The headline index fell to a below consensus 44.4 from 50.2 previously. While the series hasn’t yet a long history, it is the lowest on record, slightly below the trough reached in the 2001 recession. The details show losses in most important sub-indices. Price pressures are also easing fast.
EMU: Services PMI revised down
In the final report, the October services PMI was revised down from the pre-liminary 46.9 to 45.8, a 10-year survey low. The downward revision indicates that in the two weeks between the flash and final report conditions in the services sector have further deteriorated. Among the EMU countries hit the hardest, Spain (32.2) and Ireland (36.1) again startle the eye, but also in Germany the index has fallen now below the 50 level at 48.3.
In September, the euro zone retail sales fell by 0.2% M/M and 1.6% Y/Y. Although, the decline was slightly less than expected, the deterioration of the labour market and decline in real wages suggest that little improvement should be expected over the coming months.
Other: Horrible UK services PMI raises rate cut expectations
In the UK, the services PMI showed business activity in the important services sector shrinking at its fastest pace in the 12-year survey history, as the index fell to 42.4 in October from 46.0 in November. Activity in the sector is now seen con-tracting for the sixth consecutive month, and even more worryingly the forward-looking components suggest little improvement in the months ahead, as the incom-ing new business (40.1) and outstanding business (39.3) decline even faster. The in-creasingly difficult economic environment has however eased price pressures, as both input prices (58.1) and prices charged (51.6) slowed.
Also in the industrial sector, activity is slowing rapidly. Output declined for the fifth consecutive month, notably by 0.2% M/M and 2.2% Y/Y in September. The situation in the manufacturing sector is even worse with production falling for the seventh month in a row by 0.8% M/M and 2.3% Y/Y. On a quarterly basis, industrial and manufacturing production is down by respectively 1.1% and 1.3% Q/Q.
Hence, both pieces of eco data confirm that the UK economy is currently in re-cessionary territory with little indication of a quick recovery. Within this envi-ronment, inflation can be expected to drop sharply over the coming months, which opens the door for more aggressive rate cuts when the MPC meets tomorrow.
